Freakonomics Radio - 457. Is Dialysis a Test Case of Medicare for All?

Episode Date: April 8, 2021

Kidney failure is such a catastrophic (and expensive) disease that Medicare covers treatment for anyone, regardless of age. Since Medicare reimbursement rates are fairly low, the dialysis industry had to find a way to tweak the system if they wanted to make big profits. They succeeded.

On last week's episode, we asked whether the U.S. healthcare system is really as messed up as people think. Oh, I think absolutely the U.S. health system is as messed up as people think it is, probably more so. In the U.S., we spend 17% of our GDP on healthcare, around $3.5 trillion a year. The big players are doing extremely well. The stakeholders are making a ton of money, except for one stakeholder, which is the patient. As we were interviewing doctors and healthcare economists and policymakers, there was one story that kept coming up as a cautionary tale. Here's Zach Cooper.

He's a healthcare economist at Yale. You want to know why the U.S. health care system's messed up? Look at how we treat folks with end-stage renal disease. End-stage renal disease, or ESRD, is the final and permanent stage of chronic kidney disease. It's also known as kidney failure. By this point, the kidneys are no longer able to perform the vital function of filtering your blood. Left untreated, the

condition is fatal. What are the treatment options? Here's Ryan McDevitt, an economist at Duke. Transplant is the most preferred option. It's the only way to cure this condition long term. But kidneys are very scarce. Not all patients are suitable for one. And what happens when a kidney transplant is not an option? So really, almost all cases, you have to go on dialysis after kidney failure. Dialysis is the process by which a patient is hooked up to a machine that helps do the job their kidneys can no longer do. In the U.S., this typically happens in a dialysis clinic, where a patient might go three or

four times a week for about four hours each session. It's really a big part of your life, and it really makes it harder to do anything else. In the 1970s, there were only around 10,000 Americans on dialysis. Today, that number is nearly 500,000. Another 200,000 people live with a transplanted kidney. Why has there been such a spike? As a population, we've gotten sicker. That's one thing. The leading cause of kidney disease is diabetes, which has also spiked.

About one of three adults with diabetes has some form of kidney disease, and about 30% of people worldwide with end-stage renal disease are diabetics. But also, the management of kidney disease has improved, so more patients stay alive long enough to be receiving dialysis. That said, it is called end-stage renal disease for a reason. One in five patients who start dialysis die within a year. The average survival rate is three years, with 100,000 new patients each year requiring dialysis. And what does it cost to treat a patient with end-stage renal disease? Each patient's costing us about $100,000 a year to treat. We're talking over $30 billion a year in Medicare spending. It's 6% to 7% of Medicare's overall budget. And it's almost 1% of the entire federal

budget, which to me is just a staggering statistic. Every $100 I send in taxes, one of it's going to pay for dialysis. And what about the dialysis industry? How would a healthcare economist like Zach Cooper describe it? The dialysis industry is just a hot mess. A hot mess because why? There's not sort of one thing wrong. How about just one, for starters? I don't know what the legal definition is of fraud, but I think you're going to see some of those firms get pretty close to the limit. Yeah, that does sound like a pretty hot mess.

So today on the show, we'll get the economists' take on the dialysis industry. Just a case study of duopoly and the bad things that can happen when there's no competition. Also, the politicians. It feels like they care more about their business model than they do their patients. And the dialysis industry itself. From the outside, that's exactly what I might think if I didn't have more information. All right, then, let's have more information, starting right after this. This is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dubner.

The economist Zach Cooper is co-director of a research project called 1% Steps for Healthcare Reform. He came to the conclusion that the U.S. healthcare system is so complex, so full of opaque practices and perverse incentives, that it's hard to make any one big change that will radically cut costs. Instead, he enlisted a bunch of other healthcare economists to come up with evidence-based solutions that would each trim maybe 1% from overall spending. His thinking being that if you have enough 1% solutions, you'd make real progress. One research topic that Cooper himself has explored is what's called surprise billing. That's when, for instance, a patient with insurance goes to a hospital that's

in their insurance network but winds up seeing an out-of-network doctor and gets stuck with a huge bill. This is one of countless examples of healthcare spending where the dollars don't flow in the magnitude or direction you might think they should. It's easier to make money taking advantage of the rules of the healthcare system than it is to improve patient outcomes. And there are a lot of firms who have business models that basically exploit broken rules or nooks and crevices that lead to inefficiencies. Cooper discovered that the dialysis industry is a prime example. Within the U.S. healthcare system, the dialysis industry is an outlier for a few reasons, the biggest one being its relationship with Medicare, the federal health insurance program for older Americans. In the 1970s, Medicare expanded

and legislators basically codified that if you had end-stage renal disease, you could get Medicare coverage. This is very unusual. For all ailments except one other, ALS or Lou Gehrig's disease, Medicare doesn't kick in until you turn 65. Why is dialysis an exception? It goes back to the invention of dialysis technology in the 1960s. For folks who had end-stage renal disease, it was like dialysis or death. And it was really, really expensive. And the question was like, how do you allocate it across individuals? Committees were set up to assess each patient's

so-called social worth. These committees came to be known as God panels. They were essentially choosing which patients would live and which would die. For seven years, the federal government debated what to do about this new technology that saved lives but cost so much. And then in 1972, under President Nixon, they actually did a dialysis of a patient on the floor of the House of Representatives. It was this powerful moment that captivated legislators. The chair of the Senate Finance Committee at the time was Russell B. Long, a Democrat from Louisiana. I sat there and thought to myself, we are the greatest nation on earth, he later recalled, the wealthiest per capita. Are we so hard pressed that we cannot pay

for this? And the thing got inserted the 11th hour into a Medicare reform bill and changed the shape of Medicare program. So while Medicare for all is not yet a thing in the United States, Medicare for all dialysis patients is with one key stipulation. Private insurance picks up the first 30 months if you are on private insurance when you begin dialysis. That, again, is the Duke economist Ryan McDevitt. Why 30 months? Someone in D.C. decided 30 months is the right number and we've been sticking with it. So for some people with kidney failure, especially younger ones who are still working, their private or commercial insurance picks up the dialysis bill for the first two and a half years, at which point Medicare coverage takes over.

Although the disease is so exhausting that many of these patients have to stop working. Then they lose their private insurance and move on to Medicare. And here is a key fact. The rates paid by Medicare to the big dialysis chains are much lower than the rates paid by private insurance companies. Medicare just sets a rate. You have to take it or leave it. But the big chains can negotiate very high reimbursements from private insurers, three or four times as generous as Medicare reimbursements. Medicare rates do vary a bit, but typically one dialysis session is priced at around $250. So for a patient getting dialysis four times a week, the clinic gets $1,000 a week from

Medicare. But if the patient has commercial insurance, the same clinic might get up to $4,000 a week. And so these big companies basically make all of their profits from a very, very narrow sliver of commercial insured patients. Cooper says around 12% of people who need dialysis are funded by commercial insurers. And the guesstimate is for some of these big firms, that's about 40% of the revenue and all of their profit. The U.S. dialysis market is dominated by two large firms, that's about 40% of the revenue and all of their profit. The U.S. dialysis market is dominated by two large firms, DaVita, which is based in Denver,

and Fresenius, with headquarters in Germany. DaVita and Fresenius are rivals when it comes to running dialysis clinics, but because Fresenius also manufactures dialysis machines, DaVita is also one of their biggest customers. McDevitt again. These are for-profit, publicly traded companies. So their mandate, their whole reason for existence is to make as much money as possible. And that's what they do. In the most recent years for which they reported earnings, DaVita had about $1 billion in profits, Fresenius nearly $1.4 billion. So nowhere near Facebook profits and not even as much as Netflix, but still a very healthy business. And think about the nature of the dialysis business and

its clientele. If you are the kind of business person who envies a subscription model like Netflix's because it guarantees a steady flow of revenue. Well, it sounds terrible to say so, but dialysis patients are about as loyal as any subscriber can be, which makes dialysis clinics an attractive investment target. Over 30% of DaVita's stock is owned by Berkshire Hathaway, the investment conglomerate run by Warren Buffett.

As we discussed in last week's episode, medicine has become very much a profit-driven industry, with even non-profit hospitals making a lot of money thanks to their tax-exempt status. In order to profit maximize, healthcare firms often scale up and consolidate, just like you see in other industries. And that's what's happened in the dialysis market. Of the 7,500 dialysis clinics in the U.S., more than 5,000 are owned by either DaVita or Fresenius. We went from about 80% independently run dialysis clinics to now we're two-thirds in these two big chains. Really just a case study of duopoly and some of the bad things that can happen

when there's no competition. Is McDevitt saying DeVita and Fresenius are somehow colluding? I would say not quite collusive. I don't have any evidence they've gotten in a back room somewhere and tried to hash out deals. But in economics, you don't really need that. Our theory is they can learn to stay away from each other,

not invade each other's turf. In a previous Freakonomics Radio episode called America's Hidden Duopoly, we described a much more famous duo, the Democratic and Republican parties, and how they rely on each other to collectively dominate the market for votes. Ryan McDevitt argues that DaVita and Fresenius have become nearly as dominant in their market, having spent the past 30 years buying up independent dialysis clinics. These were often owned by nephrologists, kidney doctors, or a hospital. You might think a consolidation like this would trigger antitrust concerns,

but any one dialysis clinic just isn't that valuable. Maybe $4 million in revenue per year. But any one dialysis clinic just isn't that valuable. Maybe $4 million in revenue per year. So that's way under any threshold for antitrust scrutiny. No one's really going to look at this. The University of Chicago economist Thomas Wollman calls this stealth consolidation. And we should probably expect more of it. 20 years ago, the threshold for reporting a merger to the Federal Trade Commission was $10 million. Now it is $90 million. In the case of DaVita and Fresenius, their acquisition

of so many dialysis centers gives them market power, which in turn gives them bargaining power with commercial insurance companies. That's how they are able to set an insurance price that can be four times higher than the Medicare price. In a case like this, where denying care would mean death, insurers just don't have much leverage. Now, again, consolidation is common throughout the healthcare industry. Hospital chains, doctors' practices, equipment manufacturers, you see it everywhere. One reason is that administrative costs now make up roughly one-third of all healthcare spending in the U.S. That's partly because of regulations that have made practicing medicine so much more

complicated, and this certainly includes the regulations for a dialysis clinic. They're quite burdensome data requirements. They have to report a lot. And the chains are good at that. They have a good IT system. There are kinds of scale when it comes to all the other record keeping they have to do. So for an independent nephrologist, it's really hard to keep up with the data side of it. SISE also allows a big chain to approach profit maximizing the way that maybe a fast food chain might. DaVita, they had a very charismatic CEO, Kent Theory. He said he wants to run all his clinics like a Taco Bell. If I had 1,400 Taco Bells and 32,000 people who worked in them, I would be doing all the same stuff. And that was intriguing to us because maybe

there's the idea that if we standardize care, if we cut out a lot of the waste, maybe we can have better outcomes at a lower cost and we're going to solve a lot of our health care problems across the U.S. It turns out, though, you probably don't want to run your health care system like a Taco Bell. Because why? Well, the stakes are a lot different. If you cut back on the quality of your meat or you don't clean your Taco Bell quite as frequently, maybe it results in a poor dining experience, but no one's life's really at stake. To be fair, people have suffered severe illness from eating contaminated food at Taco Bells, but you get the point. Kent Theory was CEO of DaVita for 20 years. He stepped down in 2019.

His emphasis on growth and scale inspired Ryan McDevitt and a few other economists to study DaVita, Fresenius, and the rest of the dialysis industry. They analyzed about 12 years worth of Medicare claims and clinical data that included everything from drug dosing to staffing information to patient outcomes. Last year, they published their findings in the Quarterly Journal of Economics, one of the leading journals in the field. The economists identified three major changes after a for-profit chain like DaVita or Fresenius would acquire a dialysis clinic from an independent operator, many of which had been run as non-profits. One would be the drug doses. We see for each patient what kind of doses they're getting from which drugs each session. We saw, for instance, that

EPO doses nearly doubled right after acquisition for the same patients at the same facility as soon as the ownership changed. EPO, or erythropoietin, is a hormone that in a healthy person is made by the kidneys. It helps produce red blood cells. As McDevitt notes, you wouldn't expect a given patient to suddenly need double the amount of EPO simply because their dialysis clinic had a new owner. And how did new ownership affect clinic staffing? You have two main people working at a clinic. You have the nurses and the dialysis techs. Nurses have more extensive training, tend to be higher quality, at least they're viewed as higher quality labor. Higher quality labor,

meaning higher paid labor. So the for-profit chains emphasize more techs than nurses. We also saw the facilities have more patients per employee. We also saw more patients per machine, which again, in a for-profit setting, you like to see that they're running a lean operation, they're being more efficient. But in dialysis, there's a big trade-off. If you can't thoroughly clean and disinfect each station between treatments, you put your patients at risk. And then we see it in data. One of the outcomes that deteriorated after acquisition were the blood infection rates. Patients got more infections after an acquisition. So those all sound like potential downsides of consolidation and somewhat more serious

downsides than you'd worry about if you owned a few thousand Taco Bells. There was one more big difference McDevitt saw after an independent dialysis clinic was acquired by a chain. We saw on the first year of dialysis, the rate of being on the transplant wait list or actually getting one fell about nine and a half percent. Remember, the best possible outcome for a patient with kidney failure is to get a transplant. That obviates the need for dialysis. I think that's really, for me, that would be the biggest statistic, is whether you get a successful transplant.

Not every patient with kidney failure is medically qualified to get on a transplant waitlist. It's also possible that as the patient population becomes sicker, the share of qualified patients may fall. Still, a 9% drop in patients getting on a waitlist after a clinic was acquired concerned McDevitt, and he found it fit a larger pattern. I have seen a number of interviews where representatives of DaVita and Fresenius, they actively tell patients not to seek out a transplant. You're not going to like it. It's going to be a burden for you. You're going to lose your family, your community. You're coming here three times a week. We're family now.

Would a firm like DaVita really do what McDevitt is suggesting? We went to the source. My name's Jeff Gillian. I'm a kidney doctor from Denver, and I serve as the chief medical officer for DaVita. So some of the people we've been talking to have made the argument that DaVita and others may actively discourage some dialysis patients from entering the transplant protocol, from getting on a donor waitlist, even if they might be a good candidate. Now, that's a big charge. A cynic would say that, you know, a firm like yours would rather keep that patient as a customer forever rather than have them receive a new kidney and no longer need your dialysis.

Absolutely unequivocally false. I think that from the outside, it would make perfect sense. Gosh, if a patient gets a kidney transplant, they no longer require your dialysis services, and hence you've lost a patient. That is not the way we think. While there are always financial incentives that drive decisions in all sorts of industries, within dialysis, I think it is significantly, significantly more nuanced than that. The easy answer is always a financial one. And I'm here to tell you both as a physician and now as somebody who does population health management at an administrative role, it's not the financial issues that occur. Quite frankly, as a physician, I wouldn't work for a company that was using financial incentives to make those types of decisions. It wasn't so long ago that medicine

was considered a higher calling. It was different from auto manufacturing or agriculture, even law. But one consequence of medicine having become an industry, remember, it constitutes 17% of our GDP, is that ethics and dollars don't always line up just right. Jeff Gillian makes it sound as though medicine still is a higher calling for him and for DaVita. I asked Ryan McDevitt, the Duke economist who has studied the firm, if he agreed. I haven't been inside the organization, so it's really hard for me to say. I know they present themselves that way. At Duke, we send a lot of our graduates there. A former DaVita executive just made an eight-figure donation to Duke. we send a lot of our graduates there. A former DeVita executive just made an

eight-figure donation to Duke. I know a lot of my former students work there, and they're great people. I think they really do care. They want to make a difference. But when you look at these stats from Medicare data, they just jump out of the page at us. Considering that eight-figure donation, did anyone at Duke ask you to reconsider any details in the paper that you published on them? My business school dean would, of course, be much happier if I had found that DaVita was saving the world. But we have independent research. No one's at Duke telling me what I can and cannot publish. Coming up after the break, if you don't like what you've learned so far about the big dialysis firms, you are definitely not going to like what you hear next.

That's coming up right after this. It's well known that the U.S. spends more money on health care than any other country, and yet has far from the healthiest population. Medicine has become, at least to a significant degree, a market-driven industry with massive spending on pills and procedures, but not much spending at all on prevention or health maintenance. One example? End-stage renal disease, in which nearly half a million Americans receive treatment covered by Medicare that costs about $100,000 a year per patient, with roughly half of that money going to dialysis clinics and the rest to inpatient facilities. The dialysis industry has come to be dominated by two firms, DaVita and Fresenius. As we've heard so far,

a peer-reviewed economic analysis shows these firms behave in a variety of ways that seem closer to profiteering than just profit maximizing. From the outside, I think that's exactly what I might think myself if I didn't have more information. Jeff Gillian used to be a kidney doctor in private practice in Denver. Now he is the chief medical officer at DaVita. He says that, yes, much more could and should be done to promote kidney health, but DaVita's mission is to care for patients who reach ESRD or end-stage renal disease. I think about it a little bit like a trauma center. So a trauma

center at a local hospital does not want there to be a massive pileup on the highway. A trauma center doesn't want there to be a mass shooting. But a trauma center exists because unfortunately those things occur. And the truth of the matter is in dialysis, we feel the same way. I would love it if there was no more need for dialysis, if there was no more kidney failure. I would go out and find another job in a heartbeat. But unfortunately, that's not the world we live in. And we do have people that need dialysis.

And so we are here, just like that trauma center is there, to take care of those patients that need it. And what does Gillian say to the research showing that consolidation in the dialysis industry has led to higher profits, but worse outcomes for patients. Mortality has decreased by a third over the past two decades. So I think that these ideas that somehow profits come at the expense of taking great care of patients, I think it's nonsense, quite frankly. I understand the attractiveness of trying to paint this as nefarious, but I do think that it's a natural outgrowth of the payment system.

That's Jeffrey Himes, also a kidney doctor and the chief medical officer of the North American division at Fresenius Kidney Care, the other big dialysis firm. I don't think this is a phenomenon that's limited to dialysis. It's happened with health care systems all over. It's happened with all kinds of businesses. Medicare reimbursement for dialysis has been very slow to keep pace with expense, and it becomes increasingly difficult to operate a dialysis company at small scale. Jeff Gillian of DaVita recalls these financial pressures from when he ran his own nephrology practice. As a physician, I always felt like I wanted Medicare to reimburse me more for the care that I gave because our costs as a physician group were always rising. Our nurses cost more from year to year, our electricity and our rent cost more from year to year. But that increase in dialysis payments really has not gone up significantly on a year to year basis.

Economists who have studied the dialysis industry agree that these fixed and relatively small Medicare payments do not enable dialysis firms to make much money, at least not without some creativity. Remember, here's what the Duke economist Ryan McDevitt found when he analyzed data from dialysis clinics after they'd been acquired by one of the big chains. They nearly doubled the drug doses for patients. And again, we're looking at the very same patient before and after this acquisition. So it's not that characteristics change. It's not like they got sicker. Everything else was held constant. It was just that change in owner that was driving all this difference. How does McDevitt explain the increased doses? Medicare was giving fee-for-service reimbursements for these drug doses,

which means that each dose the clinic gave their patients was a marginal profit, and it was quite lucrative. It was up to 25% of DaVita's revenue and 40% of their profits during this time period. So really, a key financial incentive to give excessive doses to patients. But that incentive was done away with when Medicare caught on to this practice. In 2011, they changed their payment system from per dose to per session. And what happened after this change? We saw doses fall about 50% right after the payment reform. As McDevitt and others describe it, the dialysis industry, and DaVita in particular, have a history of shady practices in the pursuit of higher profits.

In 2014, the firm agreed to pay more than $350 million to settle claims that it had given illegal kickbacks to doctors in exchange for patient referrals. The whistleblower was a former senior financial executive at DaVita. The following year, in a case brought by two whistleblowers, DaVita agreed to pay $450 million against charges of illegally billing the federal government for dialysis drugs. There have been other fines and settlements adding up to at least a billion dollars over the past 10 years. This is just a cost of doing business. Okay, that's fine. That's Jim Chanos, who runs a hedge fund called Kinnikos Associates.

His specialty is short selling, betting that a given stock or other asset will lose value. You've probably heard about the recent short selling drama over GameStop stock. Anyway, Chanos made his name years ago, shorting Enron stock. We've seen that corporate wrongdoing increasingly is penalized economically by fines and penalties, but that's it, right? No one ever goes to jail. And I think that's the problem. You actually have people deciding to do this, but the corporations themselves end up just paying for it if they get caught. Short sellers are often depicted as exploitive, taking advantage of a good company's bad fortunes. Chanos doesn't see it that way. The real role that short sellers play in the market that nobody else plays is that they're the real-time financial detectives.

And regulators are the financial archaeologists in the system. The regulators will tell you what happened years and years later after you've lost all your money. And short sellers have an economic incentive to ferret out fraud. We live in what I call right now the golden age of fraud. And so companies with very questionable business models have actually done better than companies playing by the rules for the most part. So Chanos is always looking for companies that make their money with a questionable business model. In 2014, he came across DaVita and Fresenius.

By this point, the drug dosing Medicare loophole had been closed. But as he dug into their business, he discovered what looked like a suspicious relationship between the two dialysis chains and a charity called the American Kidney Fund, whose mission is to provide financial support to needy patients. So the American Kidney Fund will help various patients pay for private policies. Private insurance policies, that is, instead of Medicare. The patient is strongly urged because of quality of care, convenience, whatever the case might be, that they will be treated better as a commercial policy patient rather than a government policy patient, and that the American Kidney Fund could help them pay those premiums. On its surface, that does not sound like a terrible thing for a kidney charity to do, but Chanos looked at it from the perspective of the dialysis industry.

If the dialysis companies could push people that would normally be eligible for Medicare into commercial policies, private policies, they could charge those companies often two to four times what the going Medicare reimbursement rate was. And Chanos believed that pushing people onto commercial insurance is exactly what the American Kidney Fund was doing. It's helpful here to follow the money. It will come as probably no shock that the two largest donors to the American Kidney Fund are the two largest dialysis companies, Fresenius and Davida. In 2018, Davida and Fresenius

reportedly donated a combined $247 million to the American Kidney Fund, or about 80% of the charity's revenues. So they are basically putting money into the charity. The charity is turning around and using that money to help pay premiums to enroll patients in commercial insurance. And then the commercial insurers are charged a huge premium to what the dialysis companies are charging the government. It's estimated that for every dollar that Davida or Fresenius send to the American Kidney Fund, they receive $3.50 in return from private insurance payments. And that's the problem.

One especially interesting part of this arrangement is who's losing money? The insurance companies. It isn't often you hear about insurance companies on the losing end, and maybe you don't have much sympathy. Well, it's the private sector, right? So why should we care if the insurers make less profits? Well, the fact of the matter is it's raising premiums for everybody in the exchanges. That is, the insurance exchanges, the marketplaces created by the Affordable Care Act, also known as Obamacare. And the head of California, Blue Cross Blue Shield, was on the record saying the dialysis in California was driving up private policy rates dramatically.

Some insurers have fought back without much success yet. As for Jim Chanos, he gave up his fight. He was short DaVita stock for a few years, but he exited his position in 2020. At the start of 2019, DaVita's stock price was in the 50s. Today, it's above $100 per share. A short-selling investor like Jim Chanos may not be a disinterested source on the relationship between the big dialysis firms and the American Kidney Fund. But there's been plenty of other reporting on this scheme, and the Yale healthcare economist Zach Cooper is convinced it is as unsettling as it appears. He's also convinced that it couldn't have happened without the Affordable

Care Act. Before, because you could price insurance plans as a function of an individual's health risks, you could charge huge amounts of money for premiums for folks with end-stage renal disease. But the Affordable Care Act stipulated that insurers could no longer use pre-existing conditions to charge higher premiums. The only acceptable inputs were a patient's age, zip code, and whether they smoked. So for somebody with end-stage renal disease, pre-affordable care act, if you were to try to get health insurance on the private markets, you would have basically been priced out. The insurer would have known that you were 100% going to need dialysis and then basically would have charged you the price of dialysis for your premiums.

And the high cost of dialysis was the whole reason that Medicare universally covers it in the first place. But now a patient with end-stage renal disease could buy private insurance much cheaper than they would have been able to otherwise. And those private insurers were compelled to pay the dialysis firms up to four times as much as the Medicare rate for every dialysis session. Exactly. So, Zach, how would you assess the skill, I guess, with which Fresenius and DeVita took advantage of the Obamacare loophole to funnel money through the American Kidney Fund in order

to grow their profits. So I think like Dr. Evil was looking at them going like that was like some pretty slick work. I think it's a really good example of finding a loophole and then just like driving a truck into that loophole as quickly as humanly possible. Capitalism, baby. I don't see it the same way that they see it. Clearly, they're looking at it one way and I look at it another way. That, again, is Jeff Gillian, DaVita's chief medical officer. He says private insurance gives dialysis patients significant advantages over Medicare coverage.

Medicare only pays 80% of a patient's cost. So if a patient ends up in the hospital, they are on the hook for some percentage, 20% of those costs. Indeed, a patient with end-stage renal disease has a 20% copay, not just for dialysis sessions, but for other issues that may go along with kidney failure. Patients on dialysis have, on average, about five other medical conditions. So they need to see their cardiologist. They might need to see their endocrinologist. They are hospitalized intermittently. And so the American Kidney Fund makes it possible for them to have supplemental insurance

and to pay those bills, ultimately. Why fund the insurance, however, through these non-profits where it can give the appearance of some kind of profiteering or profit laundering? Why not directly subsidize the patients either through their insurers or some other channel, including perhaps the Affordable Care Act, so that the money can be more directly used by those patients? We're not in the business of subsidizing anybody. We're in the business of taking care of patients. And so when we donate to any of these organizations, they then can distribute in a way that makes the most sense for them and for patients.

And that may be patients that dialyze with somebody other than us. So our job here is not to pick and choose who gets help. Our job is to make sure we're supporting patients. Is it true that a patient who gets American Kidney Fund money for private insurance is free to go to any dialysis clinic? In 2019, a lawsuit from 2015 was unsealed based on information from a whistleblower at the American Kidney Fund, alleging that the AKF would only buy private insurance plans for patients going to a clinic owned by one of the two major AKF funders, DeVita or Fresenius. The U.S. Justice Department, however, declined to join the whistleblower suit, and the American Kidney Fund declined our request for an interview. They did send us a statement

from CEO LeVar Burton saying that the lawsuit was filed by a, quote, disgruntled former employee who was terminated for cause, and that the American Kidney Fund, quote, fills a gaping hole in the safety net for the neediest dialysis and transplant patients. Meanwhile, there is a legislator in California who fully believes the accusations against the American Kidney Fund and the dialysis chains. We decided to introduce a bill that would essentially end this practice and say that if you are getting private insurance paid for by a third party, that you would90. His argument, like the short-selling investor Jim Chanos' argument, is that the dialysis industry's self-funded private insurance scheme is driving up costs for everyone who buys health insurance. We got complaints from the industry that, well, you're a shill for the insurance companies and, you know, they're going to save this money and what do we get out of it? I've read that the American Kidney Fund said that if the bill passed, they would leave

the state. So what does that mean exactly? What it means to me is that they really, it feels like they care more about their business model than they do their patients, because I think there are other things they could do. We didn't say you couldn't provide the policies. We just said you couldn't have the industry expect the same level of remuneration. So if they're truly a nonprofit that really cares about patients, they'd be looking for solutions to take care of those patients. You wouldn't just pull up your tent stakes and go home. And what is the status then of AB 290? Well, the bill was very contentious and, you know, the industry lobbied really,

really hard. But ultimately, we got it across the line. It was signed by the governor. And then as no good deed goes unpunished, we were sued. Sued by whom? The American Kidney Fund. In part because of the lawsuit and in part because of COVID, Wood's bill is stalled in court. In the last few years, there have also been two ballot propositions put to California voters about the dialysis industry. These would have addressed many of the issues we've been hearing about today, requiring more highly trained staff and better reporting of patient data, also potentially capping profits, especially profits derived from private insurance, both ballot proposals failed. The industry was willing to spend whatever it took to defeat these, and they did. We asked Jeff Gillian from DaVita about the most recent California ballot measure, Prop 23,

and why exactly DaVita fought it. As a clinician, one of the things that made no sense to me about that proposition was that it would require a physician to be in the dialysis center the entire time that patients are getting dialysis. Now, as somebody who's maybe not familiar with this, you might say, well, gosh, that sounds like a great idea, except that that's not the way that dialysis works. And there are, quite frankly, not enough kidney doctors to go around. There's already a shortage in this country. And so what this proposition would have done is led to the

closure of somewhere between 80 and 90 percent of dialysis facilities in California. So what that would mean for patients is one of two things. Either they would not get dialysis and they would die, which is not a good option, or they would not get dialysis and every two or three days they would have to be rushed to the emergency room to get dialysis in a hospital, which is equally not a good option because that would lead to suboptimal care and unfortunately excess patient death. Now, that sounds horrible and scary. I know that DaVita spent more than $65 million out of a total of around $105 million to defeat that California proposition last year.

The cynic in me, or the skeptic at least, wants to say, well, this is what firms do when they're defending their turf. They throw out scare tactics. They say, all these providers will have to close inevitably because you're over-regulating and people will die as a result. I'm sure that was not the intention of those who wrote the proposition, which is that kidney patients will die. They are charging you of excess profiteering. So what do you really think would be the worst thing had that proposition passed? Well, I think exactly what I said in terms of that fear that a lot of dialysis facilities would have closed. And this wasn't just our analysis. When outside medical organizations looked at this objectively, they came to that

same conclusion. And that's a very scary conclusion. So here's the thing, your firm, including from before you were there, so I'm not assigning this blame to you, but your firm has a pretty spotty track record when it comes to compliance and ethics. In 2014, DaVita agreed to pay $350 million to settle claims that it had provided illegal kickbacks to doctors. In 2015, the company agreed to pay $450 million to settle allegations that it unnecessarily disposed of drugs and then billed the federal government for that waste. So from the outside, what are we supposed to think when we read about the American Kidney Fund and what sounds like profit laundering? Are we supposed to think when we read about the American Kidney Fund and what sounds like profit laundering?

Are we supposed to think that, you know, your firm has gotten religion and turned a new leaf? It's hard for me to answer that as a member of the organization because those occurred when I was a physician in practice, when those occurred, and my practice had patients in DaVita dialysis facilities as well as other dialysis facilities, was initially a re-evaluation on my part of whether the care that my patients were receiving at DaVita was different and somehow suboptimal compared to the care that my patients were getting when they were in other dialysis facilities. And so I actually went back and looked at this and I could find no concern in terms of the clinical quality or the patient safety. And in fact, in many cases, I felt that the care that they were getting was even better. And so I made a decision at that point

as an independent physician that I wanted my patients to continue to stay where they were dialyzing. As a nephrologist in private practice before joining DaVita, were you ever offered any sort of kickback or incentive from DaVita or any other larger firm that we might consider illegal or unethical? Absolutely not. If I was, I might be sitting on a yacht right now, but no, I was not offered anything like that. Based on the evidence we've heard today, the big dialysis chains are better at maximizing profits than patient outcomes. And they appear to exploit whatever loopholes the federal government opens up.

They're responding to the incentives put in place by Medicare. The Duke economist Ryan McDevitt again. They're gaming the system, but they're playing the game that's in front of them. But really, I think it's incumbent on Medicare to set incentives in a way that aren't gamed like they're doing right now. In other words, an economist doesn't blame the dialysis industry for exploiting the incentives they're given. He blames the system for creating incentives that are so tempting to exploit. So what happens next? Does anything change? Trump, you know, did have some good ideas for dialysis care.

Before the pandemic, President Trump signed an executive order addressing not just the dialysis industry, but kidney care generally. Why do you tackle kidney care? Well, it's where the money is. That is Alex Azar, the Secretary of Health and Human Services under Trump. You remember what Ryan McDevitt said about the cost of treating end-stage renal disease? It's six to seven percent of Medicare's overall budget, and it's almost one percent of the entire federal budget. Alex Azar helped launch a series of kidney care initiatives well beyond dialysis. Financial incentives to providers to encourage prevention and early detection of kidney disease. Also, trying to encourage kidney donation by rolling back the

prohibitions against donor compensation. You can actually get compensated for lost wages, for travel expenses, and for child care, and for elder care. So try to create not an incentive, but make it easier for those who want to give this gift of life of being a living donor. Make that easier. Another big change Azar tried to work on, letting more end-stage renal disease patients get dialysis at home rather than trekking to a dialysis clinic three or four days a week. The United States of our people on dialysis, 12% are doing home-based dialysis. In Guatemala, it's 58% are getting home dialysis. In Hong Kong, it's over 80%. We lag the world in this.

Ryan McDevitt has looked at how kidney patients do in home care versus dialysis center care. Outcomes are better. Quality of life is better. That's where we should be moving as a country, trying to get more care at home. Alex Azar's own father had kidney failure. He died last year at 80, his life extended by a kidney transplant as well as home dialysis treatment. The way that works is while you're sleeping at night, you basically plug into a machine and it uses just notions of osmosis and water filtration to clean your blood while you sleep during the eight hours that you're sleeping. And you do that every single night. You may be able to keep working, keep engaged with family and everything, and you're in your own home. Given all these benefits of home dialysis and given that many other countries do much more of it, why doesn't the U.S.?

Prior to the Trump kidney care reforms, the Medicare reimbursements were identical for dialysis at home or in the clinic. For DeVita and Fresenius, there wasn't much incentive to encourage home dialysis. It's cheaper for them to have a bunch of dialysis machines in a common center with a common employee base. Their cost basis is going to be lower, their profit higher, than if they're having to support people out in the home doing that. And so the financial incentives are just against it. Not that they would intentionally steer people away from it, but it's just business. As HHS secretary, Azar worked with DeVita and Fresenius on how best to incentivize at-home dialysis. He told us that both firms have committed to increase at-home dialysis, hoping to reach 25% in the short term. To get there, Azar introduced a new payment model

that takes two forms. The first is what's called a voluntary model. So that's where those who provide dialysis and those who treat and care for people suffering from chronic kidney disease can voluntarily sign up to assume various risks. So at the lowest end of risk, providers can opt in and say, if we're able to get more people on home dialysis, if we're able to get more people to arrest their chronic kidney disease progression, if we're able to get more people to get into transplant, we'll make more money. That's a pure upside. So there's no downside risk,

but simply an incentive to get better. In other words, a direct financial incentive. And Medicare will pay more when providers use what is called qualifying innovative equipment and supplies, including home dialysis machines. The second program goes a step further. Big dialysis centers, big primary care groups, big groups of nephrologists,

they can actually assume higher degrees of risk where they actually manage the total cost of care. And so that takes your patient with chronic kidney disease and says, if you can help manage this individual to get them into transplant, which was the best outcome and lowest cost overall, you make money. This would mark a shift away from the fee-for-service model that dominates the U.S. healthcare system toward what's called value-based care, where providers are paid according to their patients' outcomes. This idea goes back to the practice of medicine before it was such a complex industry. The goal is to get or keep people healthy, not simply to perform more procedures.

We asked Jeff Gillian and Jeffrey Himes, the chief medical officers of DaVita and Fresenius, what they thought of shifting more resources upstream. There are a lot more people out there living with early stages of kidney disease. That's Gillian. In fact, one in seven of us have some form of kidney dysfunction. Now, for most of us, we will live our whole lives and that won't bother us. So if you think about this, taking off our clinical hat and just said, well, gosh, where is it that there are the most number of patients? There are the most number of patients upstream living with some amount of kidney dysfunction. In other words, a company specializing in kidney care should

theoretically be able to prosper with a patient base that hasn't reached end-stage renal disease. And here's Jeffrey Himes from Fresenius. I just don't think that it's credible to say that either the physicians treating the patients or the company are so money blind as to say that we don't want to prevent progression to ESRD. The Trump executive order on this new kidney care payment model has been frozen by the Biden administration.

Not a surprising development as the new administration evaluates which Trump health care reforms to keep. In the meantime, lessons have been learned. I think that the story of end-stage renal disease is a window about why we spend a lot on healthcare in this country. That, again, is the healthcare economist Zach Cooper. Incentives matter. If you pay firms on a fee-for-service basis, they're going to do everything they can to

squeeze as many patients through in as short amount of time as possible. And if you don't measure quality, you're probably going to see quality go down. If there's the opportunity for those firms to get higher reimbursements, if an individual has commercial insurance, you're going to see those firms buy people commercial insurance. And if you see that there's a nook or cranny or crevice that can be exploited to generate larger returns, you ought to expect the firm to enter that crevice. That's it for our show this time. We'll be back next week.

Until then, take care of yourself, and if you can, someone else too. Freakonomics Radio is produced by Stitcher and Renbud Radio. We can be reached at radio at Freakonomics Radio is produced by Stitcher and Renbud Radio. We can be reached at radio at Freakonomics.com. This episode was produced by Zach Lipinski with research help from Jacob Clemente. Our staff also includes Allison Craiglow, Mark McCluskey, Greg Rippin, Mary DeDuke, and Emma Terrell. We had help this week from Jasmine Klinger. Our theme song is Mr. Fortune by the Hitchhikers. All the other music was composed by Luis Guerra. You can get the entire

archive of Freakonomics Radio on any podcast app, or you can visit Freakonomics.com where we also publish transcripts and show notes. As always, thanks for listening. It's, you've got gotta be freaking kidding me. It's the neighbor. It's a lawnmower or something. Yeah. The Freakonomics Radio Network. Stitcher.